Wednesday, October 30, 2013

U.S. Fed maintains QE, waits for evidence of progress

U.S. economic activity is continuing to expand at a moderate pace and the labor market has also improved further, but the Federal Reserve will "await more evidence that progress will be sustained before adjusting the pace of its purchases." The U.S. central bank practically repeated its statement from September, saying it would continue to purchase $85 billion worth of Treasuries and mortgage-backed securities a month to keep downward pressure on market interest rates and "reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase programs ends and the economic recovery strengthens."
The only change to the Fed's statement today from last month was a reference to a slowdown in the housing sector's recovery while it repeated that fiscal policy was restraining economic growth. But it also omitted last month's reference to the negative impact of higher mortgage rates and a tightening of financial conditions if sustained.
The Fed, which last month surprised financial markets by continuing the size of its asset purchases, was widely expected to maintain its policy stance given the negative impact of the recent shutdown of the Federal government and the uncertainty created by the political discussions over the debt ceiling. "The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate until the outlook for the labor market has improved substantially in a context of price stability," the Fed said.
But the Fed also repeated that its quantitative easing was not on a "preset course" and future decisions about their pace would depend on the economic outlook and the likely efficacy and costs of such purchases.
Although the U.S. economy is gaining strength and the unemployment rate has continued to decline, much of the fall in the jobless rate is due to people dropping out of the workforce.
The U.S. unemployment rate fell to 7.2 percent in September while the number of employed people rose further to 144.30 million, up from 144.17 million in August. The U.S. Gross Domestic Product expanded by 2.5 percent in the second quarter from the first quarter for annual growth of 1.6 percent, up from 1.3 percent in the first quarter.
Economists expect the 16-day government shutdown and the last-minute deal on the debt ceiling to have reduced fourth quarter growth by 0.3 percentage points. Charles Evans, president of the Federal Reserve Bank of Chicago, said last week that the fiscal strife in Washington would probably delay the Fed's tapering of its asset purchases.
"The Committee sees the downside risks to the outlook for the economy and the labor market as having diminished, on net, since last fall," the Fed said, repeating its September statement.
The Fed also affirmed that it would maintain its policy rate, the target for the federal funds rate, at 0-0.25 percent - its level since December 2008 - until the unemployment rate falls below 6.5 percent or inflation remains a maximum of half a percentage point above the Fed's 2.0 percent longer-run goal.
The Fed also repeated that inflation has been running below this goal, but longer-term expectations have remained stable. U.S. consumer price inflation fell to 1.2 percent in September from 1.5 percent in August.